Signs of change?

2009-11-04

It is amazing how different certain periods can feel from others and the question is always what it means.

In this update there are some interesting new developments to be noted, such as the flurry of discoveries that has
enlightened the oil industry so far this year, or the signals of greater independence from outside
“beneficiaries” in Ghana, and other regions in Africa, or the call for some fundamental approach for the
Nigerian Delta quagmire, in which it is asked that those who played a major role in the cause of the problem, may now
please help in righting what has gone wrong.

Another interesting signal could be seen in the dealing between Turkmenistan and India, seeking secure sources of
gas, where Turkmenistan told India it may consider sourcing its gas via Iran first, in awaiting the further
developments of the TAPI-pipeline.

And then there are the developments on the LNG-market, where the long-term prospective looks very good, but the
short-term developments are showing signs of a glut on the one hand, and some early drying out on the other.
Especially Trinidad & Tobago and Indonesia seem to have been victim of over-positive reserve- and
discovery-projections and, many years earlier than expected, are struggling to fulfil commitments, let alone provide
the many still planned projects.

With the transition towards gas, as practiced in many countries to clean up their (power-) production, the long term
development seems to indicate growth in demand, and with the realisations of the projects in Australia, Iran,
Nigeria, Qatar and Russia, supply seems to be guaranteed for the decades to come.
With long-term deals a certain stability is expected to enter this market the coming years.

In the oil-market the signals seem to contradict each other. First the IEA and later OPEC declared they expect growth
in demand for oil next year and this may be a reason for the slowly rising price (although many other reasons could
be found for this as well). But at the same time there are quite some signals that the economies that would cater for
this growth, notably the US and China, might not be able to.

If we read the runes from the ever growing joblessness in the US, with attending poverty, homelessness, and the
growing chorus of uninsured, sick and elderly dependent on food-stamps, then notwithstanding the
“official” expectancy that the economy will grow again soon, there seems no real foundation for this
expectation. It seems more realistic to expect a further decrease in demand for oil & oilproducts as well as for
consumer-goods, as jobless and/or homeless people do not tend to drive much nor buy much.

For China the signals seem to indicate that growth of the economy may be expected, but that much of it is linked to
government-induced projects and stimuli, whilst the export-markets keep breaking away. Therefore the growth in
energy-demand, especially the demand covered by external sources, may not be as significant as expected.

As the third major energy-user region, Europe is not expected to bring much change in the market. Somewhere balancing
between depression and early signs of recovery, as a whole the European market has contracted and is very slowly
awakening from its shock-freeze, and growth in energy-demand, apart from seasonal influences, may be quite limited.

So what does it all indicate?

On the one hand we see a seemingly re-assuring quantity of new oil being found, as well as substantial idle capacity
that could be thrown in the market when needed.
On the other hand the signs indicate that the depletion-factor in the oldest, biggest and most prolific fields is
gaining importance and that the companies are struggling to keep them going.
This may indicate that the new production coming online in the coming years, in combination with currently idle
production, may be enough to balance the situation and ensure a certain stability in the market for the periods to
come.

New production could balance depletion, not really expecting a growth in demand, pushing the moment of
depletion-induced market-shortage a bit further into the future, taking away the reason for speculation as stability
seems to be the most likely outcome, which seems consistent with the sounds of the gradually dissolving of the
contango.

There seems to be a substantial difference between “official” noises & expectations and the
underlying realities, and one can only wonder why.

Stay alert.

Alexander

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